HEALTHCARE PROVIDERS – COVID FINANCIAL HARDSHIPS CASCADE OVER THE PROVIDER AND THEIR CREDITORS

HEALTHCARE PROVIDERS – COVID FINANCIAL HARDSHIPS CASCADE OVER THE PROVIDER AND THEIR CREDITORS

Healthcare providers across the nation are suffering financial hardship caused by COVID-19, amounting to more than half a trillion dollars since March¹. Besides the increased costs associated with COVID-19 protocols, losses accumulate due to canceled services, whether because of governmental orders, patient fear, facility limits or other business considerations.

On top of the COVID-19 financial hit, cuts to Medicare and Medicaid payments, increased charitable care, low reimbursements by insurers, low reimbursements by third-party administrators (“TPA”), and collection of receivables issues cause the concern to mount. And, the financial constrictions to healthcare providers have a cascading effect on other sectors, including the obvious employees who are out of work, as well as landlords, REITs, vendors, lenders and investors.

Healthcare provider bankruptcies have already begun and more will likely occur. Forty-two hospitals closed or filed for bankruptcy during the first half of this year alone². And even before skilled nursing facilities and other caregivers faced the worst pandemic in generations, they were struggling to stay afloat and provide quality care, operating on razor thin margins.

Now, they are required to spend more on protective equipment for staff and technology to connect residents with relatives who are not allowed to visit in person. One SNF operator in Minnesota estimated that the average 72-bed facility was spending an additional $2,265/day on personal protective gear.³ Seeking bankruptcy protection as a means to gain the time and ability to reorganize may be the only way for some providers to proceed. But, at least one court has found that a bankruptcy court lacks jurisdiction to interfere with the decisions made by the Centers for Medicare and Medicaid Services (“CMS”)⁴. And, even if a provider files for bankruptcy protection, it would be wise to anticipate how creditors will react. For instance, in the case of Gardens Regional Hospital’s bankruptcy, the State was able to recoup from Medi-Cal payments owed to the hospital unpaid Hospital Quality Assurance Fee (“HQAF”) that non-public hospitals were obligated to pay, but for which Gardens was behind in paying.⁵

So, as you can see, there can be significant legal issues and factors that make a healthcare provider’s bankruptcy more complicated than a normal bankruptcy:

• How has CARES Act funding and the temporary expansion of the Small Business Restructuring Act affected the healthcare bankruptcy landscape?
• How will the courts balance creditors’ rights and interests against the desire to keep a SNF or hospital open and operating–particularly if the facility is the only one available to an underserved population?
• If municipal bonds funded a healthcare facility, which is ultimately liable to the creditors? Can a county or hospital authority seek to shed liabilities through the hospital’s bankruptcy, without filing bankruptcy of their own?
• Will Medicare provider agreements be treated as executory contracts that can be assumed and assigned to a buyer (subject to the cure of any existing defaults)? Can Medicare obligations be extinguished in a bankruptcy asset sale?
• What is the impact of the Bankruptcy Code’s automatic stay on efforts by insurers and TPAs to recoup alleged overpayments? May the debtor sue the insurers and TPAs in the friendly forum of the bankruptcy court? How might this be affected by ERISA preemption?
• How can a buyer return a bankruptcy healthcare provider to profitability, given all of the challenges these entities face?

Framing a restructuring strategy requires a rounded analysis, including for the healthcare provider’s creditors and other interested parties.

The first step to take for any creditor or healthcare provider is to determine the options available, including workout terms, a Chapter 11 reorganization, a Chapter 7 liquidation, an asset sale, an assignment for the benefit of creditors, closing and a soft liquidation, a stock sale/offering equity to creditors, etc. Below is a chart of various options that are often considered:

On top of the normal issues are the regulatory requirements for healthcare providers, and of course, the ultimate biggest concern, the health of those for whom the provider is responsible.

All who interact with healthcare providers face the complicated issues involved with the provider’s financial difficulties and, once the financial fall starts, the problems waterfall onto everyone involved.

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1} The American Hospital Associate estimated $323.1 Billion loss just for hospitals for 2020: https://www.aha.org/issue-brief/2020-06-30-new-aha-report-finds-losses-deepen-hospitals-and-health-systems- due-covid-19 .

² https://www.beckershospitalreview.com/finance/42-hospitals-closed-filed-for-bankruptcy-this-year.html

³ https://www.nytimes.com/2020/04/21/business/coronavirus-nursing-home-finances.html

⁴ In re Bayou Shores SNF, LLC, 533 B.R. 337 388 (Bankr. M.D. Fla. 2015).

⁵ https://law.justia.com/cases/federal/appellate-courts/ca9/18-60016/18-60016-2020-09-16.html

For more information feel free to contact Dawn: dcoulson@eppscoulson.com.

EPPS & COULSON, LLP

Attorneys admitted to practice in

California, New York, Colorado, Texas, Oregon and Hawaii www.eppscoulson.com

 Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. It may be considered advertising under laws of some states. Epps & Coulson, LLP encourages you to call us to discuss these matters as they apply to you or your business.